A Pause (for now) in a Hot Market May 31, 2013

The past few days have basically been trend-less. Major up days followed by major down days. Where that leaves us is a market that is building “structure” and that’s actually good. Structure provides us with some rather firm guide posts with which to measure the future price movements.

On the chart above I’ve raised the support level (red line) to 3420, that’s where I may start to get concerned if it closes below that level. But first, a quick review: Richard Wyckoff looked for three things that signaled a change in trend.

1) A broken trend line: that’s the blue upward sloping line (it’s called a “reverse trend line”). So far it is not broken on a Close, but we’re getting very close. So now: No.

2) A major Sign of Weakness (SOW): that would likely come in the form of a break below a significant low (in this case 3420), and even more important if there is volume behind the break. For Now: No.

3) A failed rally (higher): In the short-term we had a minor failure at the point labeled “ST” (secondary test). For Now: Yes, maybe a weak failure.

What does concern me are the two recent wide-spread down bars with higher volume. That means that supply is coming in on down bars and that is selling pressure. Now as long as the selling is met with buying at lower levels, we’re OK. If buyers don’t step into the market, then we’ll break below that support level (red line) and will likely head lower.

I’m seeing a rotation in sectors now. Banks and Financials are showing strength, and even Tech is feeling (just a little) better. That’s generally a good sign, so this may (just may) be a pause in a market that needed to pause. Perhaps the beginning of the “long hot summer”?

I am finishing up the monthly newsletter which I will post under that tab / page by the end of the day Saturday. In it you’ll see the Price Strength, Money Flow charts and the Top and Bottom Sectors, so no need to repeat them here.

This price volatility shows that folks are nervous out there. No one wants to lose any money so many are trying to call a top. That could come, just not quite yet. Be careful, be watchful, next week should be interesting. …… Tom ……